A drover’s dog could have successfully managed the economies of boom states such as Western Australia and Queensland in the past decade, says Richardson, a Deloitte Access Economics partner.

But the same could not be said about Tasmania, Richardson tells The Australian Financial Review.

The dismal condition of the island state’s economy is set to be a key issue in the election on March 15. The poll was triggered when Labor Premier
Lara Giddings
sacked Greens MPs
Nick McKim
and
Cassy O’Connor
from her cabinet last Thursday.

Tasmania’s economy has weakened more than any state since the global financial crisis. From the start of 2012 to the middle of last year, state output shrank by about 1 per cent, Bank of America Merrill Lynch Australia chief economist
Saul Eslake
says.

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The island state suffers from a clutch of economic handicaps, some within the state government’s control, but many not.

It is losing population and talent to the mainland. The population – 512,000 – is barely growing. It is too small to justify the administrative burden of two layers of ­government.

It is suffering a drought of business investment that could continue for several years. The planning system – there are 29 different state and local schemes – is a real problem for the state; it holds up worthwhile investments, encouraging governments to try to “pick winners" with tax holidays or grants. The government spends more than mainland states per capita on health and education services “that no Tasmanian thinks are better", says Eslake, who is from Tasmania.

Unemployment worse

Unemployment – 7.7 per cent – is worse than the national rate of 5.8 per cent by proportionately more than when it hit 13 per cent in the 1990s (the national rate peaked at 11 per cent). Education participation and achievement lag the rest of the country badly. Output per capita is 25 per cent below the rest of the country. The Australian dollar sets too high a price for Tasmania’s unproductive workers, even though they are cheaper dollar for dollar than mainland workers. And so on.

“It lacks people power," says Richardson. “Business investment is business putting their money where their mouth is. By and large it’s not happening in Tasmania."

Some of the state’s problems are beyond the state government’s influence. For example, most goods have to be shipped to and from the mainland, and the cost of coastal shipping has been pushed up by rising fuel costs and by Australia’s rules excluding foreign ships and crews from competing. These rules do Tasmania no favours, Richardson says. They were tightened by the former federal Labor government last year. The high value of the dollar is another example.

Tasmania’s Liberals, led by
Will Hodgman
, are favoured to take government after 16 years of Labor-Greens governments. They are championing an old chestnut – a pulp mill in the picturesque Tamar Valley – which the Labor-Greens government opposed. Labor’s desire to switch to supporting the pulp mill was one of the reasons ­Giddings dumped the Greens.

But Richardson says it is better for governments to set generally business-friendly rules and get out of the way.

That is one example of something that the state government could do better. Another is fixing the high cost and low quality of state services such as healthcare and education, Eslake says.

Demographics are particularly painful for Tasmania. As well as being less educated and less productive than the rest of Australia, its population is older, sicker and more likely to be disabled. Fewer than half of all adult men are employed full-time – and the participation of prime age (35-49 year old) males and females has fallen well behind the mainland.

Economic and social consequences

These problems have economic and social consequences. Tasmania’s labour productivity lags by enough to offset the low wages – which Tasmanians see as a competitive advantage. A sparsely populated state such as Tasmania cannot avoid some dis-economies of scale, Eslake says. But Tasmanian governments have made the problem worse by delivering health and education services through smaller administrative units than mainland states, he says. The average Tasmanian school has 230 children, against 350 on the mainland. Hospitals are smaller and more costly to run, yet deliver worse health outcomes.

There are cultural hurdles as well. “High school" ends at year 10, pushing 15 and 16-year-olds out the door with “leaving certificates". They can continue in 11 and 12 “colleges", but these only exist in Hobart, Launceston, Burnie and Devonport, and a higher proportion drop out. Fewer than half of Tasmanian secondary students finish year 12, far below mainland levels. “It’s up to the Tasmanian government and people to change the attitude towards participation in education," Eslake says.

The state government can do something about the high unit cost of delivering services, Eslake says. “They could amalgamate and rationalise hospitals and schools." But one disincentive to reform is the national tax system. Tasmania’s gross state product per capita lags the national average by 25 per cent. But the federal tax and transfer system acts to ensure household disposable income is only 8 per cent below the national average.

“It works as it’s meant to but it does shelter Tasmanians from the consequences of their poor economic performance," Eslake says.

The goods and services tax distribution also helps Tasmania at the expense of richer states.. WA Premier Colin Barnett and mining magnate and federal MP Clive Palmer from Queensland want to see more GST revenue returned to their states.

“I would love for Tasmania not to be as dependent on the GST as it is," Eslake says.

“But I don’t want to get there by taking $600 million from the poorest state and and giving it to the richest. What I want to see is Tasmania through its own efforts narrowing the gap between it and the rest of the nation so that Tasmania doesn’t need to get as much under the GST."